Low credit score? What you can expect

If you have a low credit score, you may struggle to rent a house or enrol your children in school. Here’s how to overcome some of the challenges you might face.

Firstly, you need to know there is no such thing as blacklisting. You cannot be blacklisted in South Africa and there is no list of people who cannot, under any circumstance, get credit. Instead, every consumer has a credit record that shows how they use and manage credit. You score points for paying on time and paying off debt and lose points for being a late payer or defaulting on a payment. The higher your score, the better your credit risk. Credit records are kept by credit bureaus such as Transunion and Experian.

Many organisations run credit checks for various reasons, and when they do, your credit record will reflect your debt and debt payment history. Organisations need your permission to run a credit check so you will always know if they are checking your credit record.

We spoke to DebtBusters, to find out how a low credit score (under 500 – 550 points) could impact on your life.

What does a low credit score mean for you?Credit bureaus collect information that show how much debt you have, where it is and how you manage it. Your credit record shows both positive behaviour – when you pay on time, and negative behaviour.

Three kinds of negative credit behaviour are:

• Paying accounts late
• Defaulting on a debt - when your payment is overdue for an extended period of time (usually more than six months)
• Judgements - when action has been taken against you in the High Court

The frequency and number of these incidences have different weightings in financial institutions’ credit scoring processes – but as soon as you have a default or judgement, most major financial institutions will no longer grant you credit.

You may also encounter problems in the following areas:

Rental agreementsMost estate agents will run a credit check against your name when you are applying to rent a home. If you have a low credit score, their internal processes will probably prevent them from letting to you. However, if you find a sympathetic agent or landlord and can show that the reason for the low score no longer exists, or that your circumstances have changed, you might be able to come to an arrangement. If this doesn’t work out, you will probably have to do a private rental found through the classifieds or by word of mouth through friends.

School applications

If your circumstances have improved, you may be able to negotiate

Most schools’ number-one concern is whether parents will pay their fees. So many will request permission to run a credit check. When a sought-after school sees a poor payment history on a credit report, they will be less likely to grant your child a place. Again, if your circumstances have improved and you are able to meet your financial obligations, you may be able to negotiate. If you are applying with paperwork and no face-to-face contact, and have signed permission for a credit check, you may want to include a letter explaining the background and your current circumstances. 

Service agreementsWhen you sign a contract with a cellphone provider or an insurance provider, they might ask to run a credit check so that they can discover whether you have a history of non-payment of accounts.

Obviously, when it comes to cellphones, you can purchase a pay-as-you-go SIM card without really being inconvenienced in any way. In terms of insurers, your credit record can affect your premium, so you might have to shop around until you find someone willing to enter into a contract with you at a price you can afford.

Employment at a financial institutionBanks and other financial institutions subject potential employees to a high level of scrutiny. They need to know employees are honest and reliable and unfortunately, a poor credit record can indicate a lack of trustworthiness.

If you have a current judgement on your credit record, it would be a good idea to keep the job you have, or to look for work outside of the financial services sector.

Any form of creditWhile there is almost no chance that the leading banks will grant you further credit, if for some reason you need to borrow money and are able to pay it back, smaller lenders might still be willing to grant you a loan but probably at a higher interest rate. Going into more debt is inadvisable, as it will slow your financial recovery and impede your ability to pay back the money you owe.

Any existing lines of credit you may have will not be closed, so if you have a credit card or a retail account that you have managed to keep paying, use it only in an emergency, but rather look to close the accounts.

Improving a low credit scoreWhile there are ways to work around the challenges you face if you have a low credit score, the best way to improve your score is to repair your credit record. The only way to do this is to pay back the money that you owe, so if your financial situation has improved, do what you can to get rid of any outstanding amounts as quickly as possible. And don’t take on any more debt! If your debts are really high and you are struggling to pay them, consider debt counselling.

Good luck in returning to financial health.

Original article published on: 8th August 2016
Updated on: 30th January 2020